Bad credit second mortgages make up a sizable part of the mortgage market. According to a recent survey by the Mortgage Bankers Association, the number of second mortgage originations increased by 13 percent in the second half of 2005 and closed-end second mortgages increased by 33 percent. The survey included 114 lenders that originated $189 billion in second mortgages, many of them to people with bad credit.
There are at least five numbers that determine the ultimate cost of a bad credit second mortgage: interest rate, years on the job, credit score, closing costs and term length.
Interest rate
The interest rate on a second mortgage is slightly higher than on a first mortgage because it is in a subordinate position. If the borrower defaults and the home goes into foreclosure, the second mortgage is settled after the first, so the lender is taking a greater risk.
The interest rate on a bad credit second mortgage will be higher still, so says Steven Frank, Senior VP at FlexPoint Funding, one of the nation's largest subprime mortgage bankers. “A bad credit borrower is someone with a FICO score below 62. He or she will pay between 1.5% and 2% higher interest for a second mortgage, but there is no shortage of money or willing lenders in the bad credit mortgage market.”
Work history
When considering a bad credit second mortgage, lenders look at the borrower's ability to repay the mortgage. This is verified by checking his or her current employment and total income. Mortgage lenders prefer that the borrower has been employed at the same place for at least two years, or has been in the same line of work for several years.
Credit score
The lender will also look into how the borrower has met previous financial obligations. This is where a credit report and credit score come into play. A credit report lists a person's credit activity for the last several years. It shows the highest balance, current balance and payment history on every account. Negative data such as late or missed payments gets erased after a few years but a bankruptcy can stay in the report for up to ten years.
Credit scores (also known as FICO scores) range from 900 down to 300. A score of 680 or higher signifies good credit. A score between 620 and 680 will cause most mortgage lenders to take a harder look at a borrower. If the number is below 620, as Mr. Franks points out, the person falls in the bad credit range and is charged more for a bad credit second mortgage.
Closing costs
The closing costs associated with a bad credit second mortgage will be cheaper than refinancing a first mortgage. In addition to minor processing fees, some lenders may charge an up-front fee in the form of a percentage of the total loan amount (known as "points”). A borrower may also be able to pay points to lower the interest rate on the loan.
Term length
The longer the bad credit second mortgage, the lower the monthly payments but the more interest paid overall. The shorter the second mortgage, the higher the monthly payments but the total costs will be lower. It is in the borrower's best interest to choose the shortest possible term he or she can reasonably afford.
Bad Credit Second Mortgage
What is a Bad Credit Second Mortgage?
A bad credit second mortgage, also known as an adverse second mortgage, is a loan that is taken out on a property you already have a mortgage on. The reason for undertaking a second mortgage is usually to release some of the equity, in order to help pay other debts, or to raise finance for a particular project. An bad credit second mortgage is the name given to a second mortgage product that is specifically designed for people with an adverse credit history.
Is an adverse credit second mortgage my only choice?
Your choice of finance will depend on your current circumstances and what you need to achieve. If you have a property with an existing mortgage and you only need to raise a certain amount of capital, then you should consider a second mortgage. You can specify the amount you would like the mortgage to be for; it doesn't have to be for the full value of your property. If you have applied for other loans or mortgages and been rejected because of your credit history, then you should investigate an adverse credit second mortgage to see if it meets your needs.
How will I know if I have an adverse credit history?
The first sign of an adverse credit history is when your application for a loan, credit card, store card or mortgage is rejected. This is usually because the lender has checked your credit rating and decided you are a bad risk for their standard products. If this is the case, you should check your credit report to see if it is accurate and so that you know exactly what position you are in. If you run several credit and store cards and have defaulted on any loan or other payments, then your credit history and rating could be affected. If this is the case, you will need to use specialist products such as a bad credit second mortgage to help resolve your financial problems.
Will it increase my debt?
A bad credit second mortgage should help you to manage your debt, provided you use the loan money to reduce your existing debts and you meet the repayment requirements on your other debts, such as your existing mortgage and your new second mortgage. This loan requires a proportion of your home as security, so it is important that you make the payments.
How can I find out more about adverse credit second mortgages?
Taking out an adverse credit second mortgage is something you should do when you have serious debt problems. For this reason, it is important that you talk to an independent professional adviser, such as a mortgage broker. With expertise in the market, they will be able to assess your current circumstances and recommend a product that will help you to manage your current finances whilst keeping monthly payments to a minimum. They will impress upon you the need to be sensible about your debts and serious about clearing them, but will also be able to help you plan properly so that you can use the capital raised by the bad credit second mortgage to improve your chances of eliminating your adverse history.
Both Mike Hamel & Elizabeth Grant are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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